Now for everyone’s favourite topic: taxes!
No? Alright, while they may not be fun, they are necessary — so here are some things you should know about co-ops and taxes.
Disclaimer: this document is intended to provide the reader with a basic understanding of the common processes and considerations associated with the tax treatment of co-operative businesses. This should not replace professional advice from an accountant or lawyer.
Like any other business, a co-operative should generate a profit or net income to ensure its expenses are covered and it is operating in a healthy financial position. The profit (or “surplus”) a co-op makes will be subject to corporate taxes by the federal and provincial governments. To calculate the tax rate, add the federal corporate tax rate (which is consistent across the country) to the provincial tax rate (which is different in each province).
If a co-op’s profit is less than $500,000, it is eligible to pay the federal small business tax rate. This makes the tax burden a bit lighter and is designed to help business start-ups.
Dividends, refunds, and bonuses
Co-operatives issue returns to their members in a few different ways. Depending on how a co-op decides to do this, it can have tax advantages.
A co-op can issue a share of its profits (a dividend) to its members before it pays its tax, which lowers its overall income. For example, a worker co-op can issue worker bonuses (as a way of sharing its profits). This technically increases the co-op’s labour costs, and lowers its taxable income. Another example is retail co-operatives that issue patronage refunds to their members in proportion to how much they spend at the co-op. Doing this essentially adjusts the price of the goods a member has purchased (by giving them some of their money back) and lowers the co-op’s taxable income.
Though lowering its net income to gain a tax advantage may be a good strategy for a co-op, it should also consider the impact this could have on its members. Though the co-op won’t have to pay tax on the money it distributes as worker bonuses or investment returns, this will add to the member’s taxable income.
Because this could negatively impact the member by, for example, moving them into a different tax bracket, it should be considered before allocating profit. The patronage refunds paid back to members based on goods they’ve purchased (like groceries, household merchandise, etc.) are not subject to personal income tax.
A co-operative may also choose to enter into an agreement with its members that allow the business to retain some of the profits that might otherwise be given out as a patronage rebate. This profit will still be available to the member and will either be paid out at a later date, or when the member decides to redeem their shares. This will allow the co-op to allocate its profit without significantly reducing the amount of capital it has on hand.